Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 7 - Evidence, February 24, 2000
OTTAWA, Thursday, February 24, 2000
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine the present state of the domestic and international financial system (capital gains tax).
Senator Leo E. Kolber (Chairman) in the Chair.
[English]
The Chairman: We are continuing our study of the capital gains tax. This morning we are extremely delighted to have with us a man with the worldwide reputation of Dr. Allen Sinai, who at this moment is chief global economist and chief executive officer of Primark Decision Economics, Inc. He is also chief global economist of the WEFA Group. Previously, Dr. Sinai served as chief global economist, managing director, at Lehman Brothers. He is a pioneer in econometric model building and the use of economic information systems for forecasting, analysis and monitoring of the economy and financial markets.
Dr. Sinai is adjunct professor of economics and finance in the Lemberg Program of International Economics and Finance at Brandeis University. He has also taught at the Sloan School of Management at M.I.T., at New York University, Boston University, and the University of Illinois. He is also a member of the Time Magazine board of economists.
That is a highly abbreviated CV. I read the complete one last night, and that took quite a while. Over the years Dr. Sinai has been consulted by administrations from both political parties on key economic issues, including the Clinton administration and the Bush and Reagan administrations. Welcome, Dr. Sinai. Please proceed.
Dr. Allen Sinai, Chief Executive Officer and Chief Global Economist, Primark Decision Economics, Inc.: In a new era of government budget surpluses in the United States, Canada and elsewhere, country after country will be facing new and pleasant fiscal and societal choices: how to optimally use fiscal surpluses to achieve economic and social goals. Ongoing federal government budget surpluses will be a reality in the U.S. under most macroeconomic scenarios, and also for Canada. Conservative estimates are as much as $96 billion over the next five years. That is a figure in the November economic and fiscal update of the Ministry of Finance, which probably is too low given how things look going forward in the Canadian economy.
Other countries, such as the United Kingdom, Finland, Denmark, Ireland, Sweden and Australia, are in budget surplus situations now, and more countries, particularly in the Eurozone, are likely to see surpluses emerge as consequence of structural reductions in the growth of outlays, efficiencies in the government sector, and cyclical gains in tax receipts from what likely will be an extraordinarily long, vigorous global business expansion.
How each country uses federal government budget surpluses will shape its economy in the dimensions of domestic economic growth, employment and unemployment, inflation, international competitiveness, profits, standards of living and investment returns, and will shape its society in profound ways. Budget choices in terms of the use of budget surpluses may be, perhaps, the most important economic choice facing a country such as Canada. It is much more pleasant but no less significant than was the tough task of eliminating budget deficits in the 1990s.
In this statement, I look at capital gains tax reductions generally and analytically, mainly in the context of the U.S. experience and in terms of possible applicability to the Canadian situation. I will discuss four points: one, the pros and cons of capital gains tax reduction; two, effects on economic activity, jobs, entrepreneurship, productivity and potential output growth -- the latter being a proxy for the sustainable rate of economic growth, or potential standard of living for an economy or a country; three, effects on saving, investment and new business; and four, the role of capital gains tax reduction in enhancing international competitiveness in an increasingly globally competitive world economy.
Since every country with fiscal choices under conditions of budget surpluses starts with a different set of initial economic conditions, public debt and currency conditions, and political and social setting, prescriptive commentary on an individual country must be cautiously and carefully taken. However, the U.S. experience may offer some insights that apply to Canada, so I will offer some observations and perspectives on the Canadian situation.
The main perspective for Canada is that reductions in the rate of capital gains taxation for individuals and corporations would be an appropriate use of budget surpluses to promote economic growth, jobs, saving, investment, entrepreneurship and innovation, new business formation, and increased potential output at a low cost in lost tax receipts. As one tax measure in a full program of debt reduction, tax reduction and increased government spending targeted at productive areas such as health care -- which is part of any country's infrastructure -- education and information technology, capital gains tax reductions have a lot to offer.
Depending on the unlocking effect, which is a unique feature of capital gains tax reductions, the revenue loss likely would be minimal and the bang for a buck in gained output per dollar of lost revenue quite high. Also a perspective on Canada, given that the Canadian economy is heading for full employment, increases in the potential growth or supply side of the economy would be welcome.
Finally, the incentive effects of marginal personal income tax reductions, combined with reductions in capital gains tax rates, can be quite powerful in stimulating work effort, jobs, entrepreneurship, innovation and new business, a major dynamic now in the world at large. The incentives of the Canadian tax system will need to be internationally competitive in order to attract business, workers, entrepreneurs and the new technology necessary to be competitive in an increasingly competitive, technology-based global economy.
Let me turn to pros and cons of capital gains tax reduction. The use of capital gains, the presence or absence of them, varies widely around the world, but there is no doubt that the trend is toward lower, less and in some cases no capital gains taxation in most of the countries in the world. There are no capital gains taxes in Belgium, Hong Kong, the Netherlands, Singapore and Taiwan. There are no long-term capital gains taxes in Germany. There is a six-month holding period. There are very limited capital gains taxes in Japan, and in the United States, only a maximum 20 per cent rate on long-term capital gains for individuals with a one-year holding period. Against those countries' use of capital gains taxation, you find quite high effective capital gains taxes in countries like the U.K., Sweden and Canada. Capital gains taxes are being taken down in the U K. The effect of tax on capital gains for individuals in Canada is not so high at the federal level relative to other countries, but it is when taken in conjunction with the personal, marginal and provincial tax rates on income that are applied to 75 per cent of any capital gains.
In the United States, periods of lower effective capital gains taxation, absolutely and relative to the tax rates on ordinary income, have been associated with strong economic performance, active job growth, increased entrepreneurial activity and an increased standard of living, particularly over the past decade. While one cannot attribute the performance of the U.S. economy to capital gains tax reduction alone or to reductions in marginal personal tax rates that effectively lower the capital gains tax rate, the association is striking.
In tax policy, there are a number of criteria for judging any tax. In the case of capital gains taxation, they number six. First, there is fairness or equity, often called equal treatment under the tax law of equals. The second is distortions in relative prices or the efficiency of the tax. The third is the cost of capital. The fourth is the effect of a tax measure on international competitiveness. The fifth is the degree of taxation of capital in a growing economy. The sixth is the effects on growth and macroeconomic performance. The last criterion has received relatively little attention, with most studies of capital gains taxation being microeconomic in nature and few performed on the full scale of the macroeconomic effects.
In many countries, the political and social weighting of the fairness criterion for judging capital gains taxes has been very emotional. It has boiled down to a "rich versus poor" issue. This is less an economic issue than it is a societal and political issue. Certainly for affluent families and poor families, it is a big emotional issue. There is and has been a belief that reducing capital gains taxes was unfair, favouring the very rich versus the poor and increasing and making more unequal the distribution of income. Those arguments are defensible on many grounds, and every country must decide the weight to be placed on a given tax measure relating to fairness versus the other criteria that I listed in terms of making a judgment on policy. I do not quarrel on emotional grounds on this fairness issue. I simply point to the other criteria with regard to capital gains taxation as generally being quite favourable to lower capital gains taxes as a tax measure.
In the modern global economy, where international competitiveness and the internal mobility of resources, labour and financial investment are quite crucial, the criteria for judging capital gains against other forms of tax reduction probably would carry different weights than used to be the case. These days, in more and more countries, even the poor are tied, directly or indirectly, to the equity market, with more ownership across more income levels, and middle-income and high-income constituencies increasingly outright share owners of capital, especially in the United States, through direct participation in equity markets, indirect participation because of retirement plans, and increasingly through compensation that takes the form of equity ownership or stock market participation in companies where individuals work.
Capital gains tax reduction generally gets a positive grade on the criterion of distortions in relative prices or tax efficiency, depending on initial conditions. It also gets positive grades on the cost of capital and international competitiveness dimensions. Whether capital gains taxes are onerous in terms of the taxation of capital in a growing economy varies from situation to situation, but in most countries capital is taxed more times than it should be under standard dimensions for judging taxes. The effects of capital gains tax reduction on macroeconomic growth and economic performance relative to the revenue loss of the tax reduction receive positive marks in my work. Only the fairness criterion could unambiguously be viewed as a negative, depending on societal objectives.
On the fairness issue, a lot of work has been done in the United States by the American Council for Capital Formation. I believe you had a witness from the ACCF. They present evidence arguing that it is not as unfair as normally thought. I prefer to stand back on that issue -- rich versus poor, fairness versus unfairness -- and look at the other criteria, which I think would, in the modern world, receive much higher weight than ever before. What do capital gains tax reductions do to the economy?
What I have to say here is based on work in computer-model simulations with a full system of the U.S. economy that includes numerous processes and channels on how capital gains taxes affect financial markets, the cost of capital, economic activity, entrepreneurship, potential output, and the feedback on tax receipts because of what reducing capital gains does to the economy, stock market and capital gains realizations. My analytical and discussion comments are drawn from years of research encompassed in this rather large-scale model of the U.S. economy that is updated through the middle of 1999 and therefore captures much of the new economy factors and tendencies that have emerged in the United States in recent years.
There are limitations to work based on econometric models. These models, in a sense, are backwards looking. They are based on data that covers periods of time in the past and structural situations that may not be the same in the future. They are, by their very nature, averages in the quantitative results and in the responses that they show when one asks questions of them. However, as rough approximations and a disciplined quantitative way of obtaining the truth of history and, perhaps, for the future of what various policy changes will do, they are, I believe, very useful.
I cannot tell you that the work that I have done with this model of the U.S. economy necessarily exactly applies to the Canadian situation. However, we do study Canada in detail and follow its policies. It is very much, in its generic processes, like the business cycles and systems that exist in the U.S. economy, as are many other economies we study, analyze and predict, including the G-7 countries and altogether some 46 countries around the world. I feel reasonably confident that what I am about to say to you about how capital gains tax reduction works will roughly have applicability here. At the same time, I want to be clear, in a "truth in lending" full disclosure sense, not to tell you that I could say as a scientist that this is the absolute truth about the Canadian economy. It is, for you, information and I certainly have my views on how capital gains tax reduction might be used and applied in the Canadian economy as a consequence of the work that I have done.
What capital gains tax reduction does is increase savings, capital spending and capital formation, which, in turn, helps economic growth. That, in turn, helps increase jobs, productivity and, through the productivity increase, the potential output of an economy.
The increases relative to what might have happened otherwise are definitely significant but, I would say, probably small to modest in magnitude. We are not talking about a tax measure that would raise economic growth in aggregate demand the way large reductions in marginal personal income tax rates would. We are talking about a tax measure that I believe has the effects that I will describe but that is fairly modest in the dollar amounts.
You must pay to get the benefit of capital gains tax reduction in the sense of reducing tax receipts ex ante. Per dollar of lost revenue, though, the effect is a very powerful stimulant to the economy. It does not cost much to use capital gains tax reduction. Its leverage is quite high in terms of the ratio of output and jobs created per dollar of tax loss. It cannot fully pay for itself, as some might argue, through massive increases in unlocking unrealized capital gains. It might do so for a very short time, but the feedback effects on tax receipts from capital gains tax reduction are raising income, raising corporate profits. That is standard in terms of stimulating the economy.
That creates some tax receipts that help pay for the initial tax reduction. In this case, a higher stock market would create some increased wealth, increased spending, increased jobs, increased income, increased profits. That also brings some extra tax receipts. Then there are the capital gains realizations, unlocked and that come from a better stock market, that bring increased tax receipts to the government even though the capital gains tax rate has been lowered. There are more revenue-feedback effects that come back to the government as a result of this tax measure than are to be found in any other tax measure that exists.
The reductions in statutory capital gains tax rates and in the effective capital gains tax on individuals raise the after-tax return on equity to shareholders and reduce the after-tax weighted average cost of debt and equity. That leads to a higher stock market as individuals shift investments toward equities. It increases household wealth through a balance-sheet effect of increased valuation on the holdings of equity assets. That in turn has a positive effect on consumption.
By the way, the effect on consumption is nowhere near as strong as the effect on consumption caused by an increase of one dollar in income. Nevertheless, it is still a significant positive effect on consumption that increases output, business profits and, in turn, provides the wherewithal and incentive for business capital outlays on equipment and plant to rise. That, in turn, produces higher real GDP.
New-business incorporations will rise as well with the increase in economic activity and the increased incentive effects that come from lower capital gains taxes. There is a supply-side entrepreneurship effect. Jobs are increased, along with earnings and corporate profits leading to increased consumption and greater economic activity. That, in turn, induces more spending on consumption and investment and increases expected future earnings in stock market valuations. That reduces further the cost of capital, inducing more entrepreneurial effort.
This is the set of simultaneous interactions and the virtuous circle that goes on from reductions in capital gains taxes on individuals mainly and, to some extent, on corporations as well. As this activity goes on, it induces additional tax receipts at the federal and provincial levels from individuals and corporations on income, sales, excise and social securities taxes. So to some extent, the static or ex ante cost of the capital gains tax reduction is reduced.
It is important in evaluating this tax measure and, I would argue, all tax measures, to look at it in terms of the initial costs -- almost an initial investment in terms of lost tax receipts -- and then try to find out how much of that initial cost is recouped from the positive effects of a tax measure to see the ex post or net tax cost of such a measure. On budget work in the United States, our budget committees have moved to this concept. It took a long time before they analysed tax measures in this way, making distinctions between ex ante and ex post tax receipts.
A significant channel for the effects of capital gains tax reduction is the so-called wealth effect on consumption. In the model of the U.S. economy that we use, the propensity to consume wealth through increased stock price appreciation, if it is permanent, is about 5 cents on the dollar. The lags are a year and a half to two years. One dollar of disposable income, when it rises, perhaps because of a new job, causes 70 cents of additional consumption, we estimate, after a year or two.
In addition, realized capital gains that result from lower capital gains taxes are spent to the tune of 11 cents per dollar of realizations over a year and a half. The wealth effect in this sense is enhanced. This is a new finding of our recent work -- 5 cents on a dollar of increased wealth over 18 months or two years. As capital gains are realized to take profits, 11 cents gets spent.
In the United States, 20 cents maximum goes to the federal government. The rest is saved. The saving is sprinkled over an accumulation of financial assets or a paydown of liabilities. To the extent that there are capital gains realizations that occur after capital gains tax is reduced, it is important to remember that the government gets some of those gains, households spend some of those gains, but the bulk of it is saved in personal savings that show up in holdings of other financial assets or paydown of liabilities.
Through significant effects on incentives to entrepreneurship, saving and capital formation, increases in productivity, efficiency, and potential output I find occurring, and national savings in the United States has gone up. In our analysis of capital gains tax reduction, though, depending on the impact on consumption, that may not happen to the personal savings rate.
Capital spending also is higher from a reduction in capital gains tax as a result of a lower capital cost and increased economic activity. Depending on the unlocking that occurs at new, lower capital gains tax rates and the increased realizations that generate new tax receipts, the ex post cost of the capital gains tax reduction can be very small.
In our work, we have this endogenized in the model. The revenue feedback effect makes the net cost of capital gains tax reduction rather small. When one looks at the ratio of the benefit to cost in terms of output or jobs, rather high ratios emerge. The ratios are high; the absolute amounts of the jobs creation and the growth of GDP are nowhere near as much as you would get, however, from personal income tax reduction.
More than any other tax policy, capital gains tax reduction has the best chance at minimizing the loss in tax receipts, net, relative to the gains in economic activity, entrepreneurship, productivity and potential output.
What about capital gains tax reduction in the Canadian situation? I would make the following observations. Reducing personal income and/or capital gains tax rates should stimulate consumption, business capital spending, savings, investment, jobs, the stock market and productivity, entrepreneurship and new business formation and potential output at a low cost in terms of lost tax receipts, certainly for capital gains tax reduction. The magnitudes would not likely be large from capital gains tax reduction, but would still be significant compared with the macroeconomic effects from other tax measures that would be much larger.
Indeed, in the case of the U.S. these days, our work suggests that large reductions in marginal personal tax rates should not be undertaken because the U.S. is very close to full employment and there is an aggregate demand or inflationary effect that occurs, and much less of a potential supply side effect. Preferred would be capital gains tax reduction, because it would not raise aggregate demand nearly so much but would help the supply side of the economy and thus not be inflationary, as large reductions in marginal tax rates might be.
The diagnosis of the Canadian situation is not the same, though, and I would not make the same argument in terms of marginal tax rate reductions on income or profits, taxes on corporations, or whatever is proposed or comes out in the budget next week, being too large. Canada is far behind the U.S. in terms of how close it might be to full employment. In our view, it is not that close to full employment and does not have an inflation issue staring it in the face, so reducing marginal personal income tax rates in conjunction with capital gains tax reduction would be a very powerful tax measure to take and a very powerful use of the budget surpluses.
For Canada, capital gains tax reductions are not, nor should be, the only use for government budget surpluses. I have highlighted them because of the nature of this session, but let me say clearly again that, in looking at the Canadian situation in a prescriptive sense, and though I should be cautious and humble in prescriptions for the Canadian economy, there is no doubt that capital gains tax reduction would be a positive measure to take at this time and going forward in this country.
For Canada, the budget surpluses should also be used in other ways. Debt reduction and the ensuing fall of interest rates because of lower debt outstanding will release funds for the government to spend in other uses that could be more productive than interest paid on the national debt. Part of any budget surplus use should be in paying down debt.
Selective increases in government spending also are desirable in this country with the federal budget surpluses and could add to the productive potential of the economy if concentrated on those aspects of the economy that would produce higher potential output. This would, in my view, include spending on higher education and K2 to K12, infrastructure outlays in public investment by the government, and quality-of-life expenditures such as health care. Let me emphasize that health care is part of the infrastructure now of any country, and so expenditures that were efficiency-creating or helped promote market solutions in what is in most countries inefficient resource use in health care would be positive. Then there is the funding of information technology and new technology endeavours through the private sector. That would be a proper use of federal budget surpluses.
Other tax reductions would seem appropriate in the case of Canada, given that tax receipts as a proportion of GDP are approaching previous highs. Reductions in marginal personal income tax receipts along with capital gains tax reductions could provide incentive effects that would increase the supply side of the economy commensurate with demands.
Finally, for Canada, perhaps the most important aspect of capital gains tax reduction lies in the enhancement of its international competitiveness, especially vis-à-vis the United States -- the now gold standard in many new and highly competitive business and financial activities. So long as marginal personal income and capital gains tax rates are much lower, absolutely and relative to ordinary income taxes, in the U.S. than is the case in Canada, resources -- labour, financial and investment -- will flow to the United States, draining Canada of important productive resources for its economic future and for maximizing the standard of living for its populace.
The Chairman: Thank you, Mr. Sinai.
Senator Meighen: Mr. Sinai, we appreciate your attendance here and the delicacy with which you put forward your prescriptions. I guess I will declare myself. To nobody's surprise, I find your prescriptions attractive and full of good common sense.
Obviously, as you have pointed out, there are pluses and minuses to everything, and capital gains tax reduction carries with it certain consequences. You have underlined that the major reason for hesitating to bring about a capital gains tax reduction would be because of perceived or real inequitable consequences.
Indeed, last night we had a very eloquent witness from Osgoode Hall Law School, a professor of taxation, who made that point. It was his central point. He spoke forcefully against any idea of capital gains tax reduction on the grounds that it was basically inequitable. I think you have dealt with that, but I wish to put to you one or two of the other arguments that Professor Brooks raised, and see what your comments would be.
He also said, by the way, that there would be considerable loss of tax revenue following a capital gains tax reduction, but I think you have dealt with that in your presentation thoroughly.
I will list his other points in no particular order. He said that not taxing capital gains as ordinary income very likely leads to increased economic inefficiencies. He went on to say that the so-called lock-in problem caused by taxing capital gains is only serious when investors sell their assets, and not every year as the gain accrues. He said it was not as serious as it has been made out to be.
The other point was that a preference for capital gains adds enormous complexity to the tax system; in particular, it imposes a large dead-weight loss on the economy because of the transactional complexities that it introduces and because of the wasteful tax planning it encourages. He alluded to the situation in Canada prior to the introduction of capital gains tax in 1972, when everybody did back flips in order to try to turn any income into capital gains income so as to avoid or reduce the tax burden.
Finally, he argued that it makes absolutely no sense to try to subsidize small or risky businesses by providing a tax break for all capital gains.
I am sorry to throw all those at you but perhaps you would like to comment on some of them.
Mr. Sinai: With respect to tax revenue -- although you said I dealt with another perspective on that -- in countries where they have reduced capital gains taxes, you do not find the expected loss of tax revenues that people argue. It is just the opposite. It may not necessarily be due just to capital gains tax reduction; it may be due to the climate in the overall economy at that time. What you tend to see is surprisingly high tax receipts. Therefore, I would argue the opposite: if you lower capital gains taxes, even by itself, the surprise will be better tax receipts than you think. I do not think my model work captures the full extent of how this, in the context of an entrepreneurial climate in a country, really works.
You had a question about the tax efficiency of not taxing capital gains as ordinary income, saying there was an argument that it is inefficient. I actually argue the reverse. We tax capital in most countries more than once, through various devices, and when it is earned. That is the case of appreciated values of businesses, for example, not necessarily in the case of a secondary piece of paper you buy on the stock market whose price is bid up through supply and demand in the market but through activities that produce gains in the value of an asset that are related to the business becoming more productive. The risk taking that is involved in that endeavour seems to me to require, in a market sense, a higher return in order to induce that risk taking. We know that a lot of the jobs growth in the U.S., and perhaps here in Canada, comes from small business. Risk taking should properly appear after taxes are paid. That suggests that it is inefficient to have the same tax rate you would have on ordinary income earned by a wage and salary worker where the risk to capital and the risk of enterprise are much lower.
The unleashing of locked-in capital gains upon capital gains tax reduction is pretty well documented now in the U.S. case, the scientific work having been quite massive. The debate is how long the benefits last and whether you end up some years down the road having fewer realizations and losing money. I do not think there is much debate any more on the unlocking of large amounts of funds, which then brings in tax revenues to government. Some of that unlocked money is spent but a large part is saved. Our work says a large part is saved, which is a positive aspect. I am not too fond of the lock-in argument.
Transaction complexity does vary from society to society. The distinction between a tax rate for short-term versus long-term holdings is probably worthwhile because of the amount of complexity involved in the kind of day trading that is now going on in stock markets. That does not necessarily mean the process is opening up money to go into a new enterprise, it is simply what goes on day to day. If capital gains taxes were applied to that kind of trading, it would be a very complex situation. However, the answer to that is zero capital gains tax. The answer to the complexity is not to have a capital gains tax at all. I am not quite there, but I know Chairman Greenspan of the U.S. Federal Reserve is on record as saying many times that it is so distorted, he thinks the rate should be zero.
Why subsidize all capital gains? That is actually a very good question. It is difficult in law to make those distinctions because of politics. However, I have sympathy for that viewpoint in the following kinds of situation: I buy a stock and one year and one day later I have a nice appreciation. I may know nothing about the stock; the money I used to buy it may not go anywhere except through the financial system and not actually fund some new business that needs funding to get started and that can get it only from venture funds or from equity-market IPOs. It may be that the capital gains preferential treatment I get on that is not quite the same thing or should not be the same thing as what I should get if I put up risk money for a new enterprise that some day has a major productive input on jobs. The rationale for it is that all these transactions, one way or another, will show up in the equity market. The equity market then will affect the cost of capital, which affects new productive business enterprise. You have to live with some of the non-productive capital gains preferential treatment in order to get the productive uses for real legitimate new businesses and funding of new and existing businesses who go to the market all the time.
Senator Meighen: Mr. Sinai, in 1997, the United States reduced its capital gains tax rate from 28 per cent to 20 per cent. According to my very poor math, that is about a 28 per cent reduction.
According to the leaks that are flying all around this city, the government is proposing -- we will know on Monday -- to reduce the capital gains tax from 75 per cent to 66 per cent, which, according to my math, works out to about a 10 per cent decrease. There is quite a difference in the percentage reduction between the two countries.
You said you were not as far along as Chairman Greenspan in terms of advocating no capital gains tax, and I recognize that any reduction would be dependent upon things such as simultaneous reduction in the personal marginal tax rates or reduction in corporate rates or whatever. Are there any other criteria that you would suggest should guide legislators in making these decisions?
Mr. Sinai: If that turns out to be the case, it is just a reduction in what is subject to the ordinary income tax in terms of capital gains; it is an exclusion, which is actually the most minimal and least powerful way to do it.
If marginal tax rates come down at the same time, given the change in the exclusion and the lower marginal tax rate, you would get more than a 10 per cent reduction in the effect of the capital gains tax rate. I think that would be positive.
From everything I read, it looks like there will be some reduction in marginal tax rates, as there has been in the last couple of years. More may be going on in capital gains tax reduction than the 10 per cent number that is being floated around. I would say it is not enough on a continuum. The exclusion, if it is 66.67 per cent, is way too high.
The problem is that there is not a difference between the ordinary and statutory capital gains tax rate that properly provides incentives for risk taking and entrepreneurship in a country such as Canada. I might add that, when you look around the world at what other countries are doing, you will see that some are making and some have already made a much bigger leap down. The U.K., for instance, probably will make a much bigger leap down.
What you have described sounds like a minimal step. It is in the right direction, but it is far short of what would be optimal and, I would argue again, an optimal use of the budget surpluses that will continue in this country in part because the cost of capital gains tax reduction ex post is really small.
Senator Kenny: Our witnesses last night, Mr. Dobson and Mr. Soutar, argued that a capital gains tax reduction was the single most important thing that government could do to stimulate the economy. They spoke about it being better for investors, increasing government revenue and keeping talent in the country. They argued that it was a fair thing to do because the pie would be bigger and therefore the folks at the bottom end would benefit.
You do not appear to be arguing that capital gains reductions by themselves are the single most effective prescription for the economy. If I understand you correctly, you are arguing for a more complex solution; is that right?
Mr. Sinai: Yes, I think that is correct. My judgment is that personal income tax rates are too high in Canada, absolutely and relative to other countries in terms of creating the proper investment climate. This country has magnificent fundamentals that ought to be attracting investors from all over the world, and your people ought to be happy and find, in after-tax terms, wonderful opportunities here, but that does not appear to be totally the case.
The marginal tax rate reductions will have larger incentive effects. They also have a risk of more spending. However, I do not think that is a big risk to the Canadian economy at this time.
My favoured prescription would be a combination of marginal personal income tax reductions and bigger capital gains tax reductions than appear to be forthcoming, in order to kind of hurry this country along to get competitive in terms of the tax climate as it applies to individuals and businesses.
The work I have done in the United States does not give the same power to economic activity from corporate profits tax reductions or reductions in the capital gains tax in corporations as it does on the individual side. You know there is only so much money to go around and there are other uses for this budget surplus, including debt reduction, which is very important, and targeted spending in government. There is not an unlimited amount of money to put out; thus, some sort of staging or sequencing strategy probably makes sense.
If the budget comes out as it sounds like it will, the criticism I would have is not enough capital gains tax reduction at this time. The cost of doing more would have been very little.
Senator Kenny: Leaving aside the coming budget, because it is a mug's game to guess what will be in it, why would one favour a reduction in corporate capital gains over a reduction in marginal income tax rates, particularly at the lower end, when in Canada, as you say, there is still capacity left and we are not as likely to be pushing the inflation envelope? It deals quite directly with the social problem. You avoid the social problem of fairness, for the obvious reason.
Mr. Sinai: Is your question why someone would make those recommendations?
Senator Kenny: Why would you not make them? Why would you not favour tax reductions at the bottom end? You know it will have a stimulative impact on the economy. You know that you do not have to address the problem of fairness, so why would you not weight your recommendation in that direction?
Mr. Sinai: I have tended to be impressed by the incentive effects of across-the-board marginal rates of reductions at all income levels. Much of the funding in market systems does come out of high-income levels. There are higher proportions of income saved at higher income levels than at lower income levels. Therefore, my own reaction has tended to be across-the-board reductions in marginal tax rates as opposed to skewing them at the lower end, unless there is a societal objective to do that for the lower-income people or a desire to narrow income inequality or something like that. However, in terms of economic incentive effects, I prefer across-the-board tax rates accompanied by capital gains tax reduction.
Senator Kenny: There is a societal question, and let us address it. Perhaps one of the principal arguments against capital gains reduction is that there is a sense -- accurate or not -- that there is a growing disparity between the top end and the bottom end in this country. Could you tell us how you would explain to lower-income Canadians why a capital gains tax reduction would be of benefit to them?
Mr. Sinai: Whether they can see it or not, it will create a lot of jobs for the amount of money the government spends to levy that tax reduction, and poor people may find that they are working when they might otherwise not have been. Even though they cannot see any direct benefit, it is an indirect benefit based on the stimulus to the economy, which sometimes, whether we like it or not, comes out of the pockets of risk-taking, affluent individuals and families who are looking for higher returns in after-tax terms and have the funding to make that happen. They have extra savings and they are looking to deploy them.
That is not the case for lower-income families or poor families, but in countries that have friendly tax systems, that is to say where there is not a budget deficit issue, where they are friendly in terms of personal income, corporate, and capital gains, there is usually a very strong jobs growth climate.
Senator Kenny: Could poor taxpayers not have the same benefits if the marginal tax rate of people earning $35,000 a year and less were lowered?
Mr. Sinai: No, it would be a lot less. They would spend all that money and more, which would show up in consumption, which, if you were close to full employment, would generate some inflation.
Senator Kenny: However, you just said that we are not. You said that Canada has more room than the United States.
Mr. Sinai: Yes, but you would get the allocation of funds mainly on the consumption side. Some of that would generate additional investment in new business, but most of it would be for the things lower-income families normally buy, the basic necessities of life, which would not lead to creation of new capacity or new investment.
Senator Kenny: Does buying TVs not create new jobs?
Mr. Sinai: It creates jobs in that particular area, but it will not create the same number of new business enterprises that may raise the productivity and potential output of an economy, nor will it create the capital that will go with what workers do to improve productivity growth, which ultimately will improve their standard of living. That is very difficult to sell to an individual who does not understand it.
It is trickle down. Trickle down actually happens. I hate to admit it. I grew up in Detroit and I came from a very poor area, but we learned that trickle down really does work, and people who cannot see that they are helped by it are helped by it.
Capital gains tax reduction will, net-net, cost less than many other things. The marginal tax rate reductions for lower income levels will bring some revenue feedback so, in part, ex post will be paid for, but the numbers in the U.S. are something in the order of 20 cents on $1 of revenue feedback, so it still costs the government 80 cents. In the case of capital gains tax reduction, we get revenue feedback effects of 40 cents to 45 cents on $1 spent. Therefore, it is not fully paying for itself, but that is an extra 25 cents the government gets to do something with, and individuals cannot see that.
Senator Kenny: Your arguments are compelling, but they are very hard to translate politically. That is a challenge faced by this committee. We are in dire needs of translators.
Mr. Sinai: Half of American households are now in the stock market, so rich versus poor is disappearing as an issue in the United States. In the politics of the United States, many Democrats who have never been in favour of capital gains tax reduction are now okay with it because the nature of the constituency is changing. That will probably happen here in Canada as well. It may be a little early for that, but when many Canadians, rich and poor, are tied to how the equity market does and have ownership in their own companies through options and the like, as is the trend being set by the United States, the nature of their understanding, or at least appreciation, of some of the benefits probably will change.
I do not know this country well enough to know whether you are at that point. From your comment, senator, you are obviously not, so it is not an easy sell. As a political matter, it is very difficult for any government to stress this particular tax measure by itself, because it is complicated, it has many emotional connotations, and you may not have enough vested interest in terms of the constituency to go for it. However, in the United States that constituency has changed very quickly. Half of our households now have ownership in the stock market. One of my fears is that we will become so tied to the stock market in incentives and participation that our economy will be at risk if something goes wrong and then we will have a biased vested interest to ensure that the stock market always rises, and policy-makers should not be thinking about that. They should be doing the right thing, and the stock market will do what it will do if policy-makers do the right thing.
Senator Tkachuk: If the government decides to lower capital gains, should there be, as some have argued before us, a relationship between the tax on capital gains and the tax on dividends and interest income?
Mr. Sinai: In the United States, we do not have a preferential tax on net income. We also have additional taxes at the state level on that income. Thus, dividends are taxed, and the money that creates them taxed a lot of times at the corporate level. We do not have double taxation but triple taxation. We then have another tax, an estate tax. The accumulation of the dividends in an estate is taxed yet again. Analysts such as myself regard all that taxation as wrong and distorted.
It is tricky to install a tax system that gets around the double taxation of dividends. It is tricky to have a tax system that taxes dividends at one rate and capital gains at another. I do not think I would tamper with that. As distorted as it is, I would not tackle the taxation of dividends and try to change that.
Senator Tkachuk: You mention the rate of capital gains. I think you said that we have a 75 per cent effective inclusion rate for capital gains. I am getting less and less concerned about the political argument. The United States may lower capital gains and many Canadians think that the Americans do everything for the rich, but when that socialist paradise in Germany lowers capital gains it will make a lot of people think about what is happening in the world. That leads to my next question.
We have economic arguments that are strong for lower capital gains. There are also strong moral arguments for lower capital gains. However, the paper today states that Canada is a sieve for investors' money. Some $135 billion has been lost to foreign markets in the last 10 years. There are now strong competitive reasons for lowering capital gains. We are losing our people, which is a tremendous loss to our country and something that we are all beginning to feel. Both the rich and the poor are losing their sons and daughters. All this money is flowing out because other countries are seeing the light of day and are lowering capital gains.
While you did not exactly say what the numbers should be in Canada, could you tell us what you think the competitive capital gains should be in Canada so we will not lose so much of our capital as well as our people?
Mr. Sinai: There are two ways to respond. One is specifically on the capital gains tax rates and methods of capital gains taxation itself, or as part of an overall tax system. In this country, you must create a tax climate that is attractive, in an opportunity sense, for businesses and individuals. That means both reductions in personal income tax rates and capital gains taxation. You would probably move competitive rates or levels toward those of the U.S. That is the major competitor in North America.
You are absolutely right to notice the move in Germany. I would argue that it is a competitive matter. That is what global competition is all about now. Thank God we are not competing in a war sense among the major powers. We are not devoting resources to armaments to fight wars or to get ready for them. Our competition is now economic. That is the playing field. It is a country issue. It is competition for people, money and wealth. It is a fun game. All the countries of the world will play it and be very intense about it. Germany will be there, just as your instinct says it will. You do not want to be last in line. That would be a big mistake. If you are last in line, whoever is leading the party that presides over being last in line will be out of office as quickly as constituents can put them out.
You need to look at and study it -- and I cannot give you specific numbers -- to ensure that you are competitive. Although it is a total kind of climate sense, taxes are a big part of it, competitive with the U.S. On capital gains tax reduction, while the Canadian capital gains effective tax rates are way out of line, you have provincial add-ons as well. If the maximum effective tax on capital gains were 37 per cent -- that is, if it were a 66 per cent exclusion -- and it went down to 33 per cent or something like that, it would still be too close to the ordinary income tax rate and far above the U.S. rate, and you would not have done enough.
Senator Tkachuk: My last question relates to something Mr. Sinai said about following U.S. politics. There is a big debate going on down there in the Republican Party. You said that you would argue against decreasing the marginal tax rate in the United States because it may put inflationary pressures on the economy. However, if people do not spend it then the government will spend it on something that people may or may not need and put inflationary pressures on the government. Are you arguing that excess money should be used and placed on the national debt?
Mr. Sinai: Remember that I said the initial conditions vary from country to country. Only at one's own risk should one traipse into territory of advising a country what to do when you are an outsider to that country. I have not been tender about that. I am giving you unequivocal notions here. I said that the initial conditions are important to take into account. That is hard to explain in politics. Even the phrase "initial conditions" tends to put one off. You politely said that you were not quite sure that you understood what I said. Economists are not known for being clear in terms of what they say.
Concerning the U.S. situation, it looks like we are close to full employment. We have a tight labour market. Those marginal tax rate reductions proposed by candidate Bush, as an economic matter, will produce, in my view, too much demand-side stimulus, given where we are. In the early 1990s I would have been all for it. For example, when we had a lot of slack, I would have been happy to see him propose capital gains tax reduction, which is, by itself, a more scalpel-like approach to the situation in our economy than to put a $483-billion tax cut in front of the American people. I think it is turning out to be a political loser for him. The best use in the United States of a lot of the budget surplus largesse we have would be debt reduction at this time and selective use on the government side, with an understanding and thinking about what the proper role of federal government is in the new world. It is a different world from 20 years or 30 years ago. The U.S. is kind of anachronistic in its government apparatus.
There is another side to these big tax cuts coming from candidate Bush, which is to get the money out of Washington before they spend it. The other part of tax reductions, which is mostly non-economic and political, is the propensity of central governments to spend money if they have it, a lot of times not in a productive way. That reasoning for the big tax cuts coming from the Bush candidacy is probably the most defensible. We have a lousy history in Washington of spending money, when we had it, wastefully.
Senator Tkachuk: We do that here, too. Do not take it personally.
Mr. Sinai: That is the rap of all central governments. Actually, that is a good argument for lower marginal tax rates. Simply tell people that we want to budget the government spending side. If we do that, we will get more productive, efficient government spending. That is a pretty good way to look at it.
Senator Kroft: Language means a lot.Perhaps we could find another expression for "trickle down". "Vertically stimulative" might be more helpful.
I have a specific, semi-technical question that Senator Meighen was kind enough to leave for me to ask of you today. However, before I ask that, on the lock-in, could you comment briefly on what you think of our system and estate duty, which ultimately is still an encouragement, even though a cost to pass on, as opposed to the deemed realization at death that we have? We do not have estate tax, as you probably know. The revenue take is through deemed realization at the moment of death and a capital gain imposed at that time. I do not know how familiar you are with this. I am wondering if you felt that that would have any impact on the calculation of a lock-in effect.
Mr. Sinai: It is an intriguing question. Let me be sure I understand it. I have always hoped I would live forever and I hate to think about estate and death taxes, so I do not know that much about it. Are you saying that unrealized capital gains in an estate get taxed at the capital gains tax rate?
Senator Kroft: At the moment of death, you are deemed to have realized all of your unrealized gains and you are taxed at the capital gains rates at that point, so there is a single generational simulation of lock-in.
Mr. Sinai: Then that would mean that two moments before death, individuals would quickly get that out of their estate.
Senator Kroft: Assisted by the fact that we have no gift tax.
Mr. Sinai: That is a terrible distortion. To have that situation is itself something that ought to be changed. Even an estate tax is better, in my opinion, than what you have just described.
As far as how much that locks in capital gains, I guess there is a lot of giving away of estates, and the capital gains get locked in in an intergenerational transfer. What is in the law when there is a transfer with no gift tax and the appreciated gains sit in a member of the family's portfolio? I suppose they just sit there and then the family member goes through the same issue. There is an incentive for lock-in built into the way estates apparently are taxed, from just listening to you now. I do not know the details of this in Canada.
Senator Kroft: I thought that it was something you had had a reason to turn your mind to.
Mr. Sinai: No.
Senator Kroft: I will now shift ground. I should like to come back to those who have a belief that something important could happen in the economy because of a significant reduction of capital gains tax. It gets to a point where it becomes a bit of an act of faith. You, with Senator Kenny, make the point that it is difficult to communicate the point politically, but there is a "Believe me, it will happen" sort of thing. Are there any particular aspects of the tax that might help focus on the investment or entrepreneurial sides? Are there ways that you can construct the tax that help direct it?
For instance, you made a passing reference to the length of hold. It would seem to me that if you created a greater capital gains tax benefit to a longer hold, forgetting the market-type transaction, it would be more of an encouragement for an angel investor to invest in a business and help it grow, because the incentive would be there to realize farther down. Are there techniques, either tax or no tax, or would you have two or three specific techniques that might be most stimulative to affecting behavioural change?
Mr. Sinai: Each would involve some judgment that has its political pluses and minuses. There are certain kinds of fund flows and funnelling of funds that more directly might lead to new productive enterprises than just the coining of money on a secondary market stock market gain. One could, therefore, set capital gains tax rates differentially depending on how the capital gains arise and from what source. It probably has been considered by others who have dealt with this issue, and I think it would be difficult administratively and transactionally. It might be difficult politically. However, that would be the right way to do it.
You really price through differential capital gains tax rates but make a judgment as to what is more productive and what is less productive. In some sense, you do that when you have a different holding period. When you say you must leave the money invested for a year or more, that is a statement or judgment that two weeks to a gain is not the same as leaving money at use for a year or more, and so the reward is larger in after-tax terms for taking the risk of putting that money to work for a longer time or for the likelihood that that money will go to a more productive enterprise than the example I used of day-trading. You can design a system that will do that.
You run into complex administrative and also explanatory difficulties in what already, when it comes to capital gains tax reduction, is not easy for the ordinary voter to understand unless they have actually had some capital gains, paid a tax and not liked it. Then it becomes easy to understand.
Senator Kroft: In principle, you think those things are effective.
Mr. Sinai: Absolutely.
Senator Kroft: You made a comment that deals with the concern that many of the lawyers, tax analysts and economists talk about and that I have some echoes of from pre-1972 days, which is the complexity, the restructuring and the transactional costs, all of the things that go on to recharacterize income into a capital gains form. We had no capital gains tax then, and it was a thriving industry. I was a bit confused because I thought you said that, in this respect, to go to a zero tax would be simpler than going to a lower level of tax. I do not quite understand why.
Mr. Sinai: Your point is well taken. That really means you would not have to make distinctions between alternative capital gains tax vehicles. You just know that whatever the source of capital gains, you pay zero tax on it, and it would not matter which vehicle you were in. There was a whole industry around the differences in tax treatment that came out of subtleties.
Senator Kroft: There are different types of capital gains.
Mr. Sinai: Yes. The whole industry of unnecessary resources grew up around that. You would still have the industry of finding ways to reduce the tax take through doing capital gains vehicles versus earning ordinary income. That has negatives as well because, if there were zero capital gains tax, there would be many investments done purposely just to get the tax take down, and they would not necessarily be productive investments. That was a rationale in our country for producing equal tax rates. Now we have gone back to a significant differential between ordinary and capital gains tax rates and we have a big stock option industry that has grown up around American business and that is working wonders right now for productivity but some day may not.
I might add that the ownership and the treatment of stock, when you hold for a year or more with a preferential tax rate, has been a major incentive, I think, on the managerial side and the worker side of the American economy and has had a large effect on our productivity growth. That effect has not yet been fully studied or understood, but when the history books are written on this episode in the U.S. and the tremendous surge of productivity growth that we are seeing, I have no doubt that the "maximize shareholder value" mantra of the U.S. will have had a lot to do with it. I have little doubt that some day we will overdo it and it will become excessive and we will run into instability problems from it, because that is the nature of the way these things go. However, it has been a very powerful motivating force for higher productivity in the U.S., and I will be amazed if it does not get copied all over the world.
Senator Graham: Mr. Sinai, I found your discussion very interesting, and your arguments quite compelling.
You mentioned that the Canadian economy is heading for full employment. What is your definition of "full employment"?
Mr. Sinai: That was a forecast comment. The unemployment rate is in the 6.6 per cent to 6.8 per cent area. On the labour market side, in the new economy world -- you will be amazed at this answer -- I think you can get your unemployment rate down to the 4 per cent to 5 per cent level without having any inflationary problem.
You are still a ways away from that, but job growth has been outstanding in this country. The unemployment rate is moving down rather rapidly and, of course, you are losing some people to other parts of the world as they seek opportunity elsewhere. The labour force growth may slow down. I think that the unemployment rate will move down sharply over the next year or two. This country will be surprised at how low it can go without an inflationary consequence.
Senator Graham: Conversely, there are those who would say that there are skilled employees from other parts of the world who are coming into the country in greater number than those leaving in this so-called brain drain, depending upon which economist you are talking to, or maybe which political party is putting forward the case. I think the people around this table are interested in improving the economy and creating jobs regardless of what side of the table we sit on.
The national unemployment average is 6.8 per cent, I think. You have mentioned that we may be heading for 5 per cent or 4 per cent. This is one of the most difficult countries in the world to govern given the size and the complexities of the regions and the fact that the great mass of the population lives in a 250- to 300-mile corridor along the Canada-U.S. border.
I am going back to what Senator Kenny was saying. It alludes to the difficulty of marketing this proposal because of our diversity. The unemployment rate in Newfoundland and Labrador is 20.5 per cent. The unemployment rate in Eastern Nova Scotia, where I come from, is listed officially with the average in 1999 as 18.2 per cent. Unofficially, it would be more in the order of 30 per cent to 40 per cent, because there would be a lot of people who have given up and who are not registering. Halifax is doing fine. It has an unemployment rate of 6.9 per cent.
As I have said time and again, we cannot have two kinds of Nova Scotians -- Halifax Nova Scotians and all the other Nova Scotians. That applies to much of the country. The unemployment rate in Northern Quebec is 16.2 per cent. In Hull, Quebec, the statistic is 7.2 per cent. In Ottawa, it is 6.5 per cent; in Toronto, it is 6.2 per cent and in Hamilton, it is 5 per cent. In Calgary, Regina and Saskatoon, it ranges between 5 per cent and 6 per cent.
Senator Meighen: I am looking for a question, senator.
Senator Graham: I am merely pointing out, with respect to the statement made that we are approaching full employment, that that is not true in many regions of the country.
It is a difficult country to govern. I am looking for some approaches by which we might sell your theory. What is the best way? Is capital gains tax reduction a better way than providing, for instance, grants and loans to stimulate economic growth in industry in the various parts of the country that need it the most?
Mr. Sinai: You are quite right about the distribution of unemployment. My own comment was based on the national aggregate, which we look at. Behind any aggregate is always a lot of detail.
It is quite a variance. Actually, I am quite intrigued and interested in that variance. It is much larger than in the United States. There is a higher frequency of high unemployment rates relative to the national average probably in this country than there is in the United States where the distribution of unemployment rates across the states is closer to the national average, based on the numbers that you have recited, senator. That is an unfortunate dimension. It is not one you are happy with, I am sure. It is not one with which anyone should be happy.
How do you deal with it? I think that it will be taken care of in part by strong growth in the Canadian economy, above the potential rate of growth in Canada, which can be tolerated without any policy restraint for quite some time. I probably differ on that view from many people, including, I would not be surprised, the Bank of Canada.
I had the same view for years in the United States. My view was that we could run the unemployment rate down a lot lower than anybody thought we could. I was almost a loan voice in my profession and in policy circles arguing that there was no such thing as a natural rate, and if there were, it was under 5 per cent. I have the same view on Europe. They, too, will get a lower unemployment rate without inflation than they think.
In the case of Canada, it gets back to the range of things you do with the extra money you have on the budget in terms of stimulating the aggregate economy and taking the chance that you do not run into a full-employment barrier. I am now more convinced than ever, given your statistics, that you might run into a full-employment limit in a few places, but not generally throughout the country. Let growth roll at a higher number without trying to restrain it from the monetary side. That is the first thing.
Second, the use of the budget surplus is not one measure. It should in large part be a tax reduction, which will have strong aggregate demand effects. There should be some spending increases, which will create some additional demand and also, depending on those areas that the government spends money on, help the potential supply of the economy.There should be some debt reduction. All three uses of the surplus are the way to go. As I have said before, my only regret is that you are not doing more capital gains tax reduction.
No one measure alone sops up those pockets of unemployment because they are coming from different sources. I imagine some of those high unemployment rates are tied to agriculture and maritime kinds of activities. I do not know the details of some of the other areas where the unemployment rates are so high. A strongly growing economy, helped by significant tax reductions of various sorts, is the best answer I can offer on the macro side to take care of the excess unemployment problem. I think it is superior to loans or grants and aids to specific segments of the population to deal with pockets of unemployment.
Senator Graham: You used the term "full employment". What number do you attribute to the term? Is it 5 per cent, 4 per cent, 3 per cent? What would you regard as full employment given the fact that some people are unemployable?
Mr. Sinai: I will waffle on this one somewhat by saying that I have not studied the Canadian situation in terms of what I might offer for a full-employment rate. We have it, of course, in detail in the case of the United States, and have had for years. All I can do at this point is to give you that range -- 4 per cent to 5 per cent. If, in three or four years from now, we have a raging inflation problem once you get close to that, I am okay with you having me come back and saying to me, "You were wrong on that particular issue." However, I am willing to bet you a dinner at your favourite restaurant here in Ottawa that I will be closer to right than wrong. I cannot give you a precise number on what is specifically the full-employment rate.
With regard to the unemployable, I have two responses. I take what is something of a doctor's approach. Use all the technology at your disposal to keep the patient alive, unless the patient really has almost no chance of survival, in which case you let the patient go, as old age and death approach. With regard to unemployment and jobs, I have never accepted as a policy matter, or as a citizen of my country, the notion that we cannot do better. I absolutely reject the view that there are those who are unemployable. I will not accept it. What we have to do is look for ways to find a lower unemployment rate consistent with price level stability. Where we see what looks like unemployable situations, we have to use the apparatus of government, either by working through the private sector or directly, to make those people employable.
Let me give you an example. In the U.S. we have a Democratic administration that revamped and revised the welfare laws. We now have working in the United States -- and you can anecdotally see it every day in almost every place where retail goes on -- people who you know have never worked before. Four years ago, many people in our country said they were unemployable. They do not speak the language. They cannot even add and subtract. However, there are machines that have pictures on them that they can see and they press a button and it then makes change for them, or it pulls out the hamburger at McDonald's for them. These so-called unemployable people are employable. They may be earning minimum wage, but they are earning money for the first time in their lives. I think many are off the streets of Harlem or urban areas where they were engaged in crime. The U.S. crime rate is way down. And guess what? They are not unemployable anymore and we have a 4 per cent unemployment rate in our country. We do not have an inflation problem.
If we say there is some absolute number on unemployment below which we cannot go, or if we say there are unemployable people, as opposed to looking for ways to lower that unemployment rate consistent with price level stability and finding ways to make the unemployable people employable, then that is just too defeatist for me. I am not being critical but talking about philosophy that may stem from the fact that I saw incredible pain and suffering in the city of Detroit where I grew up when we had times of high unemployment. I absolutely will not accept it. It is like you will not accept "no" for an answer. I will not accept "no" for an answer to what we or any country can accomplish in terms of achieving low unemployment and putting people to work.
The Chairman: Thank you, Mr. Sinai. You have been a breath of fresh air.
When you were reading your remarks, you omitted one sentence that I was hoping you would say something about. On page 2 you state:
Capital gains taxation has been little studied in the context of macroeconomic performance and international competitiveness.
Are you aware of any seminal studies being done in Canada? We find it hard to come up with any. There was one published recently that was reasonable. Do you know anything about the work that is being done in Canada on this subject?
Mr. Sinai: No, I do not. I will be happy to inquire. The issue is quiet in the United States now because no one is proposing it. It was not quiet some years ago. A lot of macro work was done. A good deal of work that was actually negative came out of the congressional library office or something like that. I will be happy to provide you the citations on what I know has been done on the U.S. I think almost nothing other than the study you have cited has been done in Canada. You may end up having to commission some work to be done on the issue, if you want more work on it.
The Chairman: On behalf of the committee thank you very much, Mr. Sinai.
The committee adjourned.